GY300 Week 3 Reading LT

“Education and Economic Performance: Simplistic Theories and their Policy Consequences”,
Oxford Review of Economic Policy, vol. 20.

Alison Wolf

 Education policy as an effective tool for delivering prosperity and increasing rates of
economic growth
 International comparisons suggest that as they become richer, people seek more
education for their children but provide no clear-cut evidence of economic benefits
accruing to countries which are high-spending in economic terms

Introduction

 Even though an educated national has high correlation with the wealth of a nation, it
doesn’t necessarily mean that education policy is an effective tool for ensuring
economic prosperity – though many policy makers believe that this is the case but
empirical evidence for this matter is weak
 Why might it seem plausible that to expect that increasing the amount f education
people receive will deliver increases in output? And why, conversely?

The Current Consensus

 Policy makers for the last 40 years attempted to use education as a mechanism for
increasing economic growth
o For David Blunkett, 2000 (Labour secretary of state for education) – ‘learning
is the key to prosperity. Investment in human capital will be the foundation
of success in the knowledge-based global economy of the twenty-first
century’
 Guardian newspaper article, the UKs then secretary of state for education (23 rd of
may 2002) explained that ‘A 1% increase in the number of workers with higher
education’s raises GDP by 0.5%’
 Clearly true that on average richer countries have more of their population being
educated for many more years than poorer ones- but then they also have more
welfare enhancing mechanisms such as hospitals, greater transport links etc.

Education, Human Capital and the ‘Residual Factor’

What might education achieve?

 Becker 1964 + others argue that the importance fo recognizing that peoples
knowledge and skills are a form of capital that can yield income in just the same
sense as a ‘bank account, one hundred shares of IBM, assembly lines.’ Such
capital I emobied in people- hence HUMAN capital.
 Education and training are, Becker argues the most important investments made
in human capital, but his discussion emphasizes the importance of informal
 education within the family, and of on-the-job training, as well as formal
education
 A more educated and skilled workforce is more likely to be productive – some of
the greatest revelations in recent times including computers, mobiles, drugs,
travel insurance- all depends on the existence of highly trained researchers,
engineers and financial administrators.
 However not all forms of educational ‘input’ automatically raises their recipient’s
marginal product- many policy makers tend to assume just that
 Edward Denison (1962.1964) – identifies the factors which account for economic
growth – e.g. land, capital labour, but also involved breaking them down further
– to differentiate among factors that improve the quality and efficiency – he also
emphasized the advance of knowledge and technical progress.
o From this Denison offered a number of different ways in which the USA
might increase its growth rate by 1%
o Measured education in years of formal education completed – being it is
by far the most available measure
 An assumption that rests on idea that education contributes to output is that
individual’s earnings reflect their individual marginal product (OECD, 1964)

But are such earning differences indeed a direct result of formal education
developing skills which, in turn, raise individual’s marginal product?

Why are the educated paid more?

 The continuing income advantages for graduates are used to argue that
university expansion will generate growth, as individuals ‘upskilling’ translates
into higher output and indeed, that the economy therefore ‘needs’ more
graduates (CVI 1994)
o Estimates may be misleading for two important reasons
 If the higher earnings of the educated are not because of their
education, but because of the characteristics they possess
 If peoples wages do not reflect their marginal product
At its most extreme, the first of these arguments suggests that
education levels are more or less perfectly correlated with innate
ability, and it Is this which employers are rewarding.
 Spence (1973)- concept of signalling – education and qualifications are used to
indicate attributes which are independent of, though associated with, the skills
and content with which education is overly concerned.
 A belief that people are paid their marginal product surely implies that we should
be expanding the number of lawyers for example- but once you start admitting
that earnings are not a good indicator of MP for significant social groups, the
whole case for using earnings as an unbiased indicator for society as a whole is
surely a risk
 Education imparts new and valuable skills and knowledge. It is also, second,
correlated with underlying ability, and used, with some justification, by
employers as proxy for this. Third – education provides formal credentials.
  It is extremely hard to estimate the extent to which formal education, when it
affects earning, does so via genuine skill acquisition, and how far credential
holders benefit at the expense of other people who might perform just as well.
 Relationship is a lot more complex then suggested by a simple input and output
model

Country comparisons

 Doesn’t mean that all or some education is irrelevant to workers productivity or to

helping the economy grow ^^

Country comparisons
 If countries which are broadly similar in other respects have different growth rates
and different education policies, it is very tempting to see one as the direct cause of
the other
 When countries aren’t doing well as other, policymakers quickly jump to make
comparisons
o E.g. Engish primary school mathematics more like that of Germnay and Japan,
in the wake of the third international maths and science survey results

The developing world

 British elite became increasingly convinced that its economy was failing because its
education system was failing, too (Barnett, 1986)
 Particular attention is paid to the Asian Tiger economies and to Germany
o History of Asian tigers is a good case not only for the purpose of education
but also for the role of government in directing it – e.g. the government of
Korea, where annual growth in real wages averaged around 7% throughout
60s and 70s ran a massive national literacy campaign immediately after WW2
– Then expanded vocational high schools and technical universities, even
though parents wanted their children to attend general and academic
programmes
o Germany’s success- symbiotic relationship between Apprenticeship and
manufacturing sector success – coupled with a high share of GDP for a
developed country
However no obvious relationship within the wealthy OECD, between university
enrolment rates and income per head – Switzerland, notably, has held out most
firmly against high increase in university enrolment, while retaining its position as
the richest of the non-oil states.

The Developing countries

 Comparative analyses which focus on the developing world confirm the absence of
any simple relationships but also provide indicators of why associations between
education and growth are so elusive.
o Emphasis on the importance of other policies such as openness to trade, and
argue that education and these other policies interact

Family matters: a Dynamic relationship

  If government get their other economic policies right, education will largely take care
of itself- because growth generates education as much as vice versa – dynamic and
two-way
o Two way relationship derives from the obvious benefits of education to
individuals- better careers advances, high incomes
o Growth also creates education – as income grows- families seek good schools
for their children, press them to obtain qualifications and crowd into
expanded institutions at ever higher levels
 Basic argument that education leads to growth – education increases productivity
and so the educated have higher wages – however workers also tend to earn more
and they build up time, skills on the job – this is called experience premium
o Over-time this declines – highly educated young workers should get paid
more on entry than the previous generation because they have less to learn –
and countries with the lowest are the fastest growing.
 Over-education – many people hold higher levels of formal education than necessary
for the job that they do – common phenomena in the developed and developing
 In 21st century – rich or poor, parents and children will ensure that the demand for
enough education is present, and the more wealth there is and the wealthier people
are, the more important qualifications become

So which education does help to raise the marginal products of the educated?

When does education work?

 Formal education in a major indicator however but cross-level evidence indicates

that it is no magic bullet – and how much is increased MP depends on the economic
and policy environment- and what the education involves
 Three important messages emerge
o There are cases where more education does not seem clearly associated with
higher productivity – but nature differs between countries and across time.
 Increase in school leaving age
 E.g. Weiss study on manufacturing in the USA – comparing high school
graduates and drop-out, day to day little difference, but did affect
attendance – therefore education may increase productivity bit not
always.
o Growing body of evidence points in the importance of quantitative/
mathematical skills in developed economies.
 UK – works with A Level maths
 US – importance of mathematic attainment, compared to other
educational and attainment measures have been steady
o The economic importance of both a sizable output of innovative research,
and the symbiotic relationship between a countries successful industries and
its universities are well attested
 Strength of countries in various different sectors e.g. pharmaceuticals,
chemicals, software engineering is closely related to the areas in
which they possess centres of university excellence.
 Success of clusters
Educating for the economy simplistic theories and their policy impact

The level of spending which goes into education and the quality of educational output are
by no means the same thing – this section argues that the current policy consensus can have
serious adverse effects on the quality of education, using recent UK government policy as an
example

 One approach the UK government have tried to adopt is to increase the proportions
of the age cohort staying in full-time education to age 18
o The more years each person spends in forma education, the more teachers
are needed, and the more downward pressure there is likely to be on
teacher’s salaries.
 Decreased salaries risk the likelihood that average teacher quality
declines (Eide et al.)

Conclusions
 The current political consensus concerning educations contribution to economic
performance has generated simplistic policies with substantial delirious effects –
how might matters be improved?
 One important need is for policy markers to understand economic theory and
evidence better.
o Need to focus on quality rather than quantity – because years of schooling is
most available data that’s why it is used as a proxy
o Literature in 1960s also focused on technical progress: pockets of university
and research excellence rather than mass uniform provision